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CFTC Exemption Extended for Euro Swaps

Agency grants extension till May 15 for European swap-trading platforms to demonstrate that they don't require U.S. oversight.

The Commodity Futures Trading Commission (CFTC) is giving European swap-trading platforms until May 15 to show they offer sufficient competition between banks and other firms to remain exempt from direct U.S. oversight.

The agency postponed a March 24 deadline to meet pre-trade competition and transparency standards to qualify for exemption from U.S. registration. The conditions were included in a February deal to align regulations for the $693 trillion global swaps market and share oversight between authorities.

The extension was provided for platforms “to consider the clarifications and amended conditions” needed to gain a longer-term exemption, the agency’s division of market oversight said in a letter released yesterday.

The international reach of CFTC rules has been among the most contentious issues between the regulator and financial firms that operate around the world. Wall Street lobbying groups representing banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. sought in a December lawsuit to limit the agency’s ability to impose rules outside the U.S.

The February deal was designed to allow European and U.S. authorities to share oversight of most of the swaps market. Those regulators supervise about two-thirds of the global market, acting CFTC Chairman Mark Wetjen said on Feb. 12.

The International Swaps and Derivatives Association (ISDA), whose membership includes Credit Suisse Group AG and Deutsche Bank AG, said in December and January that traders outside the U.S. have been avoiding trading with U.S. firms since an Oct. 2 deadline for platforms to register with the CFTC. As a result, the U.S. and European markets have become increasingly disconnected, ISDA said.

Removing Incentive

The deal would exclude the European multilateral trading facilities from having to register in the U.S. if they meet the CFTC’s conditions. The requirements were included by the CFTC to prevent trading platforms from having an incentive to move business overseas, Wetjen said.

Interest-rate and credit-default swaps began to be required to trade on swap-execution facilities, or SEFs, in the U.S. under CFTC rules starting Feb. 15. Platforms owned by Tradeweb Markets LLC, ICAP Plc, GFI Group Inc., and Bloomberg LP, parent of Bloomberg News, have temporarily registered with the CFTC. The SEFs facilitate transactions among banks and also between banks and asset managers or other clients.

The CFTC also released a separate letter designed to allow more firms to trade swaps with power utilities. Under the policy change, such firms would be less likely to need to register as swap dealers at the agency and then face heightened capital, collateral, and business-conduct standards. The letter allows the firms to deal in swaps with utilities so long as they don’t have more than $8 billion in total dealing activity per year.

Scott O’Malia, a Republican CFTC commissioner, said in a statement that the utilities were “inadvertently caught up by the commission’s rules.” He said the agency should pass a new formal regulation to complete the change instead of relying on the letter released yesterday.

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